2015 (5) TMI 475 - AT - Income Tax

Income from house property - Annual Value - Estimated the ALV - CIT(A) reducing the addition made by the A.O. on account of estimation of ALV and reworking of the ALV at ₹ 17,04,420/- as against that of ₹ 34,58,969/- being the ALV worked out by the A.O.Held that - This issue is squarely covered by the decision of the Hon ble Jurisdictional of Sakarlal Balabhai vs Income-Tax Officer 1974 (11) TMI 33 - GUJARAT High Court to come to the conclusion that rate of interest on cost of the building and land would provide a reasonable basis for determining the Annual Letting Value of property. Therefore, the contention of the ld. DR that instead of cost, market value of the property in each year should be adopted cannot be accepted. - Decided against revenue. Rate of interest to be adopted for determining the ALV - whether interest which would have been payable by the assessee had the assessee borrowed the money for investment in the property or it should be interest receivable by the assessee had the similar money is invested somewhere else? - Held that - for determining the income from the property, it should be rate of return on the investment of similar amount in another asset. Therefore, in our opinion, the CIT(A) was fully justified in estimating the ALV on the basis of interest which assessee would have earned on the investment of the similar amount. The ld. Counsel for the assessee had argued that the rate of interest applied by the CIT(A) at 8.5% is excessive. In support of which, he gave various examples of investment in FDRs which faced the interest ranging from 5.52% to 7.5%. Copies of those certificates from the bank are placed at page No. 29 onwards of the assessee s paper-book. However, we find that those investments were for a very short period. In first case where interest rate was 5.5%, the investment was only for 46 days. In another case where the interest was 5.6%, it was only for 31 days. In another case, where the rate of interest was 6%, it was for 91 days and in another case where the period of deposit was 366 days, the rate of interest was 7.75%. The ld. DR was fully justified that if the rate of return on the investment is considered, then it should be a long term investment because in any property nobody would make investment just for few days. Considering all these facts, in our opinion, the CIT(A) has rightly applied the rate of interest of 8.5%. We, therefore, do not find any justification to interfere with the order of the CIT(A). - Decided against revenue and assessee. Calculation of ALV in respect of one property for whole year while the property has let out only for the period of 6 months and 21 days - Held that - If the property is let out for the part period, the rent received or receivable by the owner is to be considered. Therefore, it is evident that if the property is let out for the part period, the ALV is to be computed for the part period and not for the whole year. We, therefore, direct the Assessing Officer to assess the ALV of the property for 6 months and 21 days i.e. actual period for which the property let out.

Issues Involved:
1. Estimation of Annual Letting Value (ALV) of property.
2. Adoption of interest rate for ALV computation.
3. Calculation of notional income for partially vacant property.
4. Levy of interest under sections 234B, 234C, and 234D.
5. Initiation of penalty under section 271(1)(c).
6. Withdrawal of interest under section 244A.
7. Treatment of revenue expenditure as capital expenditure.

Issue-wise Detailed Analysis:

1. Estimation of Annual Letting Value (ALV) of Property:
The Revenue challenged the reduction of ALV from Rs. 34,58,969 to Rs. 17,04,420 by the CIT(A). The CIT(A) computed the ALV based on an 8.5% interest rate on the property's cost, as opposed to the 17.25% rate used by the Assessing Officer (AO). The Tribunal upheld the CIT(A)'s method, referencing the Hon'ble Jurisdictional High Court's decision in Sakarlal Balabhai, which supports using the interest rate on the cost of the property for ALV estimation.

2. Adoption of Interest Rate for ALV Computation:
The assessee contested the CIT(A)'s adoption of an 8.5% interest rate, arguing for a lower rate of 5.5% to 7.5% based on bank FDR rates. The Tribunal found the CIT(A)'s 8.5% rate reasonable, noting that the FDR rates provided by the assessee were for short-term investments, whereas property investments are long-term. Thus, the Tribunal sustained the CIT(A)'s decision.

3. Calculation of Notional Income for Partially Vacant Property:
The assessee argued that the notional income for Property B should be calculated only for the period it was occupied (6 months and 21 days). The Tribunal agreed, directing the AO to compute the ALV for the actual period of occupancy as per Section 23(1)(c) of the Income-tax Act.

4. Levy of Interest under Sections 234B, 234C, and 234D:
The levy of interest under these sections was deemed consequential. The AO was directed to recalculate the interest in accordance with the law after redetermining the income based on the Tribunal's order.

5. Initiation of Penalty under Section 271(1)(c):
No arguments were advanced on this issue, and it was treated as not pressed and rejected.

6. Withdrawal of Interest under Section 244A:
Similarly, no arguments were advanced, and this issue was also treated as not pressed and rejected.

7. Treatment of Revenue Expenditure as Capital Expenditure:
The assessee's appeal for AY 2007-08 included a challenge to the disallowance of Rs. 9,11,602 as revenue expenditure, treated as capital by the AO. This ground was not pressed during the hearing and was rejected.

Separate Judgments Delivered:
No separate judgments were delivered by the judges; the consolidated order addressed all issues comprehensively.

Conclusion:
The Revenue's appeal for AY 2005-06 was dismissed, while the assessee's appeals for all assessment years under consideration were partly allowed. The Tribunal upheld the CIT(A)'s method for ALV computation and directed the AO to recalculate the ALV and interest accordingly. The issues of penalty initiation and interest withdrawal were not pressed and thus rejected.

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